Fixed income Portfolio management

Fixed Income

Portfolio management

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What is your investment process?

A fixed income portfolio manager offers an investment proposal.

Key questions are :

• What are his investment guidelines and objectives ?
• What his is investment universe ?
• What skills does he pretend to offer ?
• How does he control risks ?
• What are management fees ?

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Bonds and « passive management 

Classic passive strategies are :

• Buy and hold

Buy some securities with interesting yields and hold them to maturity.

• Indexing

The objective is to construct a portfolio of bonds that will equal a specified bond index

• Immunization

The objective is to eliminate interest rate risks.

Portfolio management most often refers to a benchmark

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In most cases a benchmark is needed

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• Suppose a portfolio manager says, “My portfolio returned 15% in 2009. Wasn’t that good?”
• To answer the question posed by the portfolio manager, one needs a benchmark for comparison.
• In 2009 a 15% return was excellent for a AAA bond fund but terrible for a high-yield bond fund.

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• The benchmark index is the basis against which all allocation decisions are made, including duration and curve positioning among others.

•  If an inappropriate benchmark is selected relative to the goals of the fund, the manager may perform well against the index but fall short of the desired level of return of the fund.

Fixed income funds

A fixed income portfolio manager can be responsible for the performance of different type of funds:

• Sovereign
• Credit
• Aggregate
• Global/domestic
• Currency hedged/unhedged

These are directional funds with objective is to replicate or outperform the performance of a benchmark.

Absolute return funds can buy and sell bonds on a broad investment universe with objective to achieve a performance such like Libor + 2%

Fixed Income Active management

In order to outperform its benchmark the portfolio manager will implement different bets :